Chapter Fifteen Exporting, Importing, and Countertrade 15 - Opening Case • FCX initially got into exporting because it found that foreigners were often more receptive to the company’s products • Reasons for its export success - FCX has received assistance from a number of federal and state agencies - Persistence is also very important - They have made friends as well as gained customers McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - The Problems and Pitfalls of Exporting • Firms that not export lose out on huge opportunities for growth and cost reduction • Large firms pro-active in seeking foreign opportunities • Medium and small-sized firms slow to respond - Too busy with local side of business - Ignorance of potential opportunities - Intimidated by mechanics of exporting to a foreign country McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - Information sources • U.S Department of Commerce - International Trade Administration - United States and Foreign Commercial service agency - Provide “best prospects” list, “comparison shopping service,” and customized market research survey for a small fee - Organizes exhibitions at international trade fairs to help potential exporters make foreign contacts and explore export opportunities - Matchmaker program McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - Information sources • Trade Commissions - Maintained by many large cities - Provide business counseling, information gathering, and financing • Commercial banks and major accounting firms McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - Export Management Companies (EMC) • Act as the export marketing department for clients - Help identify opportunities and avoid common pitfalls • Two types of assignments - Begin exporting operating operations for firm with the understanding that the firm will take over operations once it is well established - Provide start-up services and have continuing responsibility for selling the firms products • Drawback: A firm can fail to develop its own exporting capabilities McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - Export Strategy • Risks can be decreased by taking few steps • Hire an EMC or experienced export consultant to identify opportunities and deal with red tape • Focus on a few markets to learn what is needed to succeed • Enter on a small scale to reduce costs of any failure • Invest time and managerial commitment in building export sales McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - Export Strategy • Build strong and enduring relationships with local distributors and customers • Hire local personnel • Keep option of local production open - Cost-efficient economies of scale - Greater market acceptance McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 10 Export and Import Financing • Lack of trust between international trading partners due to several factors - Parties have never met - Language, cultural, and legal system differences - Difficulties in tracking down a party in case of default • Problem solved by using a third party trusted by both as an intermediary – normally a reputable bank McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 16 Using a Third Party McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 17 Typical International Transaction McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 18 Export Assistance • Two forms of government-backed assistance prospective U.S exporters can draw on for financing - Export-Import Bank - Export Credit Insurance www Exim.gov McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 19 Export-Import Bank • Referred to as Eximbank • Provides loans and loan-guarantee programs • Makes commercial banks more willing to lend cash to foreign enterprises • Lends money to foreign borrowers to purchase U.S exports McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 20 Export Credit Insurance • Provided by Foreign Credit Insurance Association (FCIA) • Consists of private commercial institutions operating under the guidance of Export-Import Bank • Provides credit insurance in case importer defaults in payment • Commercial and political risks taken into account McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 21 The Role of Government in the Export/Import Environment • Political - Protecting jobs and industries - National security - Retaliation • Economic - Develop/protect infant industry - Strategic trade policy • First mover advantage • The ‘catch-up’ argument McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 22 Countertrade • Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent - Governments may restrict the convertibility of their currency McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 23 Countertrade • Denotes a whole range of barter-like agreements • Primarily used when a firm exports to a country whose currency is not freely convertible - Developing countries e.g former USSR • Importing country may lack the foreign exchange reserves required • to 10% of world trade in form of countertrade - Example: Venezuelan government’s contract with Caterpillar McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 24 Types of Countertrade • Barter - Direct exchange of goods and services between two parties without a cash transaction - Two-fold problems • If goods are not exchanged simultaneously, one party ends up financing the other for a period • Goods may be unwanted, unusable, or have a low re-sale value • Counterpurchase - Reciprocal buying agreement McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 25 Types of Countertrade • Offset - One party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale - Party can fulfill the obligation with any firm in the country to which the sale is being made - Gives exporter greater flexibility to choose goods to be purchased • Switch trading - Occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 26 Types of Countertrade • Compensation or buybacks - Occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services - Agrees to take certain percentage of plant’s output as partial payment for the contract McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 27 Advantages of Countertrade • Means to finance an export deal when other means are not available • Unwilling firms may lose an export opportunity and be at a competitive disadvantage • Countertrade can become a strategic marketing weapon McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 28 Disadvantages of Countertrade • Accept alternative means of payment instead of hard currency • Exchange of unusable or poor-quality goods that cannot be disposed profitably • Expenses relating to maintaining an in-house trading department to arrange and manage countertrade deals McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 29 Firm Suitability to Countertrade • Countertrade most attractive to huge multinationals that can use their worldwide network of contacts to most profitably dispose goods McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 15 - 30 Looking Ahead to Chapter 16 • Global production, Outsourcing, and Logistics - Strategy, Production, and Logistics Where to Produce The Strategic Role of Foreign Factories Outsourcing Production: Make-or-Buy Decisions Managing a Global Supply Chain McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved ... Importing Firm McGraw -Hill/ Irwin International Business, 6/e © 2007 The McGraw -Hill Companies, Inc., All Rights Reserved 15 - 16 Using a Third Party McGraw -Hill/ Irwin International Business, 6/e ©... 6/e © 2007 The McGraw -Hill Companies, Inc., All Rights Reserved 15 - 17 Typical International Transaction McGraw -Hill/ Irwin International Business, 6/e © 2007 The McGraw -Hill Companies, Inc.,... acceptance McGraw -Hill/ Irwin International Business, 6/e © 2007 The McGraw -Hill Companies, Inc., All Rights Reserved 15 - 10 Export and Import Financing • Lack of trust between international trading